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Growth Investor
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Cabot Growth Investor 1425

In the last issue we thought growth stocks could easily have a few hiccups, and that’s generally what we’ve seen, with many well-known, extended titles hitting some turbulence. And, looking at the entire market, it lost some steam over the past three weeks, with the news-driven selling of the past two days doing some damage.

Bigger picture, our views haven’t changed at all -- this is a bull market that’s likely to move meaningfully higher in the months ahead. We remain heavily invested (88% in the Model Portfolio), but we’re watching things closely to see if this is more of a shakeout or the start of a sustained selling wave.

In tonight’s issue we write about one sector that appears to be breaking free of very long launching pad, with most components doing the same. (Our favorite name in the sector reports earnings tonight.) And we also run through all of our stocks, sharing our thoughts on many of them pre- and post-earnings.

Cabot Growth Investor 1425

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Clear

Passing T-Storms—or Something More?

On this page of the last issue, we wrote “we think the near-term is a toss-up, at least when it comes to individual growth stocks— earnings season is always tricky, and let’s face it, many leaders have had great runs over the past couple of months, which could open the door to some hiccups.”

Sure enough, after some heady runs through last week, we have seen a few hiccups when it comes to growth stocks; many of this year’s leading stocks and sectors have wobbled, with a couple nosing below intermediate-term support. Even the overall market, while still positive, has lost some steam over the past three weeks, with selling on the Fed and tariff news this week bringing most indexes toward intermediate-term support.

To be clear, our big-picture view hasn’t changed one iota: This bull market is healthy and very likely to carry nicely higher in the months ahead, and even among individual stocks, we’ve seen few (if any) longer-term red flags. So until something drastic changes, you should be thinking bullishly.

The question in our minds is whether this is a passing thunderstorm for growth, something that’s occurred a few times this year (a day or two of bad action, some wobbles, maybe a couple of stocks breakdown—but then the buyers are back at it). Or is it something more, possibly a sustained rotation out of growth that results in many leaders correcting and consolidating for two or three months?

Or, there could be a third scenario—stocks that have been running for many months without any pullback retreat, while fresher names hold up well. Indeed, it’s only been a few days, but that seems to be the case, with lesser-known (and thus lesser-owned) stocks holding up well while some of the more popular winners stall out.

As usual, it’s best to keep it simple. If a stock acts well, we’ll sit tight. If a big winner wobbles, we’ll throw up a mental stop and/or book some partial profits. And, of course, if something cracks our stop or loss limit, we’ll dump it and move on to greener pastures. Meanwhile, we’re spending most of our time researching and watching those aforementioned fresher, more resilient stocks, including one we started a position in last week.

[highlight_box]WHAT TO DO NOW: Remain bullish, but keep your antennae up. In the Model Portfolio, we averaged up in Snap (SNAP) and bought a half-sized position in Elastic (ESTC) last week, though earlier this week, we booked partial profits in Okta (OKTA). All combined, those moves leave us stakes in 10 stocks and a cash position of 12%. [/highlight_box]

Model Portfolio Update

The Model Portfolio’s had a big run both for the year as a whole and since the market’s early-June low, but this week has brought some turbulence, with many extended growth stocks seeing selling earlier in the week, and the entire market has fallen off following the Fed and tariff announcements.

We made a small move earlier this week (booking partial profits in OKTA), and from here we’ll follow the usual script—if this growth stock weakness morphs into the group’s first “real” correction of the year, we’ll prune/dump more names, but if this is yet another shakeout, we’re content to stand pat and even do some buying if the right opportunity emerges.

All told, we remain optimistic and still think that (correction or not) many growth names can head higher over time, we’ll take action if we see follow-on selling.

Current Recommendations

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BUY—Blackstone (BX 47)—Blackstone remains in good shape, having spiked to new highs on good volume last week before its recent pullback. (As a heads up, if you owned the stock before July 26, you’ll be getting a 48-cent per share dividend next Monday.) On the news front, one data-and-trading company that a Blackstone fund invested in less than a year ago looks set to be bought by the London Stock Exchange at a value that will double Blackstone’s original investment in 10 months! (The fund will still be forced to hold at least a partial position for a few years.) Bigger picture, this week’s Fed move back toward looser policy and lower interest rates (something seen from many central banks these days) is a catalyst for alternative asset managers like Blackstone, many big investors are forced to look at different areas to make money. Hang on if you own some, and if you don’t, you can buy here or on further weakness.

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BUY—Chipotle Mexican Grill (CMG 791)—While fast-growth names have generally come under pressure this week, CMG has continued higher in the wake of another better-than-expected quarterly report. (As an aside, this is a good reminder not to have too many “fastballs” in your portfolio—a few steadier names combined with some hot names lets cooler heads prevail when the sellers arrive.) Near-term, we wouldn’t be shocked to see CMG pull in a bit; the stock’s romp over 800 earlier this week (thanks mostly to some positive comments from an influential analyst) left it about 50 points north of support, and we’ve seen some profit taking since then. One interesting nugget from last week’s quarterly report: Chipotle’s sales per square foot are currently around $770, which is still nearly 20% below its 2014 (pre-health snafus) peak of $958; if the firm continues to execute, there’s a lot of growth potential just from getting that metric back to prior levels. Bottom line, the major trend of the business (earnings are estimated to rise 50% this year and another 29% next—both of which are likely conservative) and the stock is up. We’ll stay on Buy.

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BUY—Coupa Software (COUP 136)—COUP has taken some lumps this week along with just about every cloud software-related company (enterprise or cybersecurity), but it’s holding up much better than its peers—to this point, shares have barely dipped below their 25-day line and given up just a small portion of its July advance (for perspective, it finished last month up more than 7%). Combined with a rapid and reliable story with a long runway of growth, and we’re still bullish on the stock’s intermediate-term prospects. That said, we want to be prepared for anything, and given that our profit on our position reached 20% last week, we don’t want to let this trade turn into a meaningful loss. Translation: We’re fine buying here or on further dips if you’re not yet in, but should COUP close back near our cost basis (around 123) we’ll likely get out. Given that the 50-day line is currently near 128, that should give COUP enough room to gyrate normally while still protecting our principle.

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BUY A HALF—Elastic (ESTC 98)—If growth stocks enter a full-fledged correction then most things will go along with it, but so far, we’re seeing more selling pressure in stocks that have had long, multi-month runs—while many names that have only recently shown strength are holding up well. ESTC is a good example of that, with the stock holding in the upper 90s despite the recent selling in software stocks. Elastic looks to us like it could be the next Big Data stock that big investors gravitate toward, with a search platform that, in theory, can be used by many thousands of organizations for all types of applications. Numbers-wise, the fact that same-customer revenue growth has topped 30% for 10 straight quarters is eye opening and proof that clients, once they start with Elastic, expand their usage dramatically. We started with a half position last week and will look to average up if the stock (and growth stocks as a whole) move higher. If you’re not yet in, you can grab a half-sized position here.

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HOLD—Okta (OKTA 133)—We decided to ring the register with OKTA this week, taking partial profits (selling one-third of our shares) when growth stocks took a hit. As we’ve been writing for the past couple of weeks, the move was more about portfolio/risk management after a good run for the stock and reacting to some iffy action from growth stocks. As usual, we’ll aim to give our remaining shares plenty of rope to correct and consolidate if need be. Fundamentally, the firm’s been quiet on the news front for a while, though market-wise, we remain encouraged by the action of some of its new-age cybersecurity peers, including one that recently came public (CrowdStrike, symbol CRWD) that is liquid and off to a good start. A strong move back above 140 would be bullish, but right here, we’ll stick with a Hold rating and see how OKTA handles its recent bouts of distribution.

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HOLD—Planet Fitness (PLNT 78)—Honestly, PLNT has done about as well as could be expected following the very large-volume selloff in late June; shares have held that low and, recently, perked up to within a three points or so of their all-time high. It’s good to see, but the next big move will almost surely be determined by the stock’s reaction to earnings, which are due out next Tuesday (August 6) evening. (Analysts are looking for sales growth of nearly 20% and earnings of 41 cents per share, up 21%, though same-store sales and cash flow will be closely watched, too.) We’ll play it by the book—a decisive push above 82 would tell us PLNT’s uptrend is resuming, but a drop much below 70 would likely have us selling our remaining shares. For now, we’ll hold on and see what the report reveals.

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BUY—ProShares Ultra S&P 500 Fund (SSO 127)—Our thoughts haven’t changed much when it comes to the overall market and, hence, with SSO. In the short-term, the S&P 500 has lost some upside momentum, and we wouldn’t be shocked if that led to some further weakness going forward. But the vast majority of the intermediate- to longer-term evidence—from the various blastoff indicators to our market timing indicators to other studies based on the market’s unique action this year (historically, when the S&P has rallied at least 15% over a six-month stretch, it’s up an average of 8% six months later, with at least some positive return 93% of the time!)—remains bullish. That’s not to say there are any sure things, of course; if something really changes in the world, the market can make its own rules. But, as always, we’d rather go with the evidence rather than be against it. Sit tight if you own some, and if not, we’re fine grabbing some SSO around here.

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BUY—Snap (SNAP 17)—SNAP can be a bit fidgety (lower-priced stocks usually are), but the evidence continues to point toward this being a new leader in the social media space with great potential going forward assuming management continues to pull the right levers (which they have so far). One bullish nugget from the conference call last week was that Snap brought in $1.91 in revenue per active user in Q2, up 37% from last year and up 14% from the prior quarter. That’s great, but is still miles below a peer like Facebook, which saw Q2 revenues of more than $10 per user! Of course, Facebook is the gold standard in the industry, so the gap won’t fully close, but as Snap improves its ad platform and expands its reach (11 million new users in Q2, the largest figure in three years), that key metric should move higher. As for the stock, it’s pulled back after its post-earnings gap, but looks buyable here. We added our second half last week, giving us an average cost in near 16.3, and will use a loss limit on the combined position in the upper 13s.

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HOLD—Twilio (TWLO 138)—Fundamentally, there’s not much argument that Twilio is a great growth company with a bright future, and last night’s Q2 report confirmed that. The company’s revenues boomed 86% (including a 90% gain in so-called core revenue); even excluding the boost from SendGrid, organic revenue growth boomed 56%, which is rarified air for a company that’s at a $1 billion-plus annual revenue pace. Earnings of three cents per share matched expectations, while the same-customer revenue growth rate chimed in at 40%, remaining about as high as we’ve ever seen in the industry. The growth story is intact, but we downgraded the stock to Hold earlier this week and will keep it there tonight. Why? Because TWLO is basically moving sideways, unchanged from early May at this point. We’re still aiming to give our position room to breathe; if you own some, just sit tight. But we want to see a decisive show of strength before concluding the stock is ready for its next sustained leg up.

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BUY A HALF—Zillow (Z 50)—As we wrote in last week’s update, we thought we would get knocked out of Zillow when the stock initially was hit following Amazon’s move to team up with Realogy, a granddaddy of the real estate industry. But the stock found big-volume support near its 50-day line and remains in great position to continue higher—though the next big move will likely come down to earnings, which are due out next Wednesday (August 7) after the close. The headline numbers (sales expected to rise 79%, with a loss of 14 cents per share) will certainly count, but more focus will be on Zillow’s Offers segment, including how many homes were bought and sold and how profitability in that area is shaping up. If Z can react well to the report, we’ll look to fill out our position, but at this time we’ll simply stick with our Buy a Half rating and see how it goes.

Watch List

Carvana (CVNA 63): CVNA has been a bit sloppy lately, but remains within the range it’s occupied since early May. Earnings are due out next Wednesday (August 7); a strong gap up could be actionable.

Guardant Health (GH 94): On one hand, GH continues to futz around in the mid 90s, not showing much power. On the other hand, it’s still perched near its highs and has great story (liquid biopsy testing for lung and other cancers) and growth (revenues up 120% in Q1).

Inphi (IPHI 60): Chip stocks have come alive, and IPHI is our favorite from a fundamental and technical point of view. The only trick: Earnings are due out tonight, so we’ll see if a decent entry point emerges. See page 7.

Roku (ROKU 101): If you want to roll the dice, we actually think nibbling on ROKU here isn’t a bad idea as the stock sits just above its 50-day line. But we’ll officially hold off and see what happens on earnings next Wednesday (August 7).

Other Stocks of Interest

The stocks below may not be followed in Cabot Growth Investor on a regular basis. They’re intended to present you with ideas for additional investment beyond the Model Portfolio. For our current ratings on these stocks, see Updates on Other Stocks of Interest on the subscriber website or email mike@cabotwealth.com.

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Royal Gold (RGLD 119)—It’s looking more and more like gold stocks have begun a sustained uptrend, bolstered in part by the Fed’s easier stance. Frankly, most names in the group look good (you can consider the VanEck Gold Miners Fund (GDX) if you want to own the group as a whole), but we’re writing up Royal Gold because it’s always had a unique, high-margin story and the stock has shown amazing strength of late. The company doesn’t own any mines or picks and shovels—instead, it’s one of the largest royalty and streaming plays in the sector, with stakes in more than 40 mines, yet it has just 23 full-time employees! Not only does that lead to solid margins today—in the quarter ended June, the firm’s average sales price was nearly $1,300 per ounce, compared to costs of $340 or so—but, more important, it means that most (the firm estimates 75%) of any increased revenue from higher metals prices will fall right to the bottom line. Throw in the fact that management have always been good stewards of shareholder value (little new debt added in recent years and zero secondary offerings) and the firm seems like a sure thing to benefit from a rally in gold. As for the stock, it chopped sideways for three years along with most of its peers, but has now lifted to all-time highs (a rarity in the group), rallying 12 straight weeks on huge volume. Any retreat toward the rapidly rising 25-day line (now at 111) would probably mark a solid entry point.

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Anaplan (PLAN 56)—All sorts of fast-growing software stocks have come under pressure this week, and we’ll see how it goes; it’s certainly possible the entire sector corrects and consolidates after a great few months. However, we’re already seeing a little resilience among some fresher names—Elastic, which we own a half position in, is a good example, and Anaplan is another. As its name suggests, the company’s offerings help organizations do a better job of planning, and not just by the top brass once per year. The firm’s cloud-based connected planning software (its term) is data-driven and includes some predictive algorithms (driven by its Hyperblock technology) that enable users and teams (even huge ones that include dozens of people) to run scenarios to see likely outcomes. Given that most planning even at big companies is still done via guesswork and printouts, Anaplan could become the gold standard. It certainly seems on its way—the firm has well over 1,000 total customers, including 279 that pay it more than $250,000 annually (43% higher than a year ago), and we like the same-customer sales growth rate that’s consistently in the 23% range. All told, sales are growing north of 40% and, while the bottom line is in the red, free cash flow approached breakeven in the last quarter. The stock broke out powerfully from its first real launching pad in late May and has pushed beautifully higher to 60 before a little hesitation. We wouldn’t enter here, but any dip toward the rising 10-week line (52.5 now)—its first since breaking out—should present a lower-risk entry point assuming the sector hasn’t completely given up the ghost.

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Guardant Health (GH 94)—Guardant’s story revolves around the trouble with tissue biopsies, which are the standard but are far from perfect, both in terms of convenience (invasive, require hospitalization) and even results (many tumors are hard to biopsy properly). Guardant is looking to launch the paradigm of liquid biopsies, and it’s succeeding thanks to its proprietary 360 platform (60 patents issued, another 140 pending)—it uses chemistry, gene sequencing and bioinformatics to detect diseases, all from a blood test! And studies have shown that, at least with its core lung cancer test, results are as good if not better than tissue biopsies, and results come back in a week or two (about half the time of tissue). Of course, with any medical testing outfit, there’s risk from FDA approval and insurance coverage, but Guardant is managing those well and growth is off the charts (revenues up 82% last year and 120% in Q1!). The stock went vertical earlier in the year, corrected sharply and has been gradually working its way back toward the century mark. Earnings are likely out in a week or two, and any decisive breakout would be tempting.

Chip Stocks Beginning to Look Interesting

We’ve written before (probably too frequently) that we’re not giant fans of semiconductor and, to a lesser extent, networking stocks. The reason is that they tend to be down-the-food-chain companies—meaning if one or two of their big customers (say, Apple or a huge telecom outfit) cuts back on orders, their business can fall in a hurry.

That said, there have been a fair number of chip and networking stock winners over time, and they usually had a couple of common characteristics.

First, they had a unique set of products that were selling into a rapid-growth industry. Nvidia (NVDA) was the latest example, with (in most cases) best-in-class chips selling to gaming, autonomous driving and data center end markets that were booming. Before that, OmniVision (a big winner in the mid 2000s) was the key supplier of camera chips for cell phones (this was back before smartphones), which was a brand new market.

The other piece that’s in place when these winners have their runs is that the sector as a whole is in a major upmove. Stocks in the sector tend to move together, so if the group is in the early stages of a major upmove, the leaders can be big winners.

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Taking the second point first, the good news is that the sector may be getting up and going after a long rest period. You can see in this chart that the Philadelphia Semiconductor Index had a big run into early 2018 but then stalled out; even after a move to new highs early in 2019, by late May they were back in the soup—19 months of no net progress.

But now the index is back, testing new high ground. And more impressive to us are some longer-term breakouts among individual names in the group: ASML Inc (ASML), Texas Instruments (TXN) and Teradyne (TER) all gapped out of big bases on earnings over the past two weeks. All else equal, our guess is that these and other recent breakouts in the group probably work fine over time.

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But, going back to our first point above (a company with unique products selling into a fast-growing end market) our favorite idea in the sector is Inphi (IPHI). As opposed to some of the stories in this group that can give you an ice cream headache, Inphi’s ruling reason is easy to understand: The company is the leader in data movement interconnects between and inside of data centers. As data collection and cloud services proliferate, that’s a big growth market, and the combination of higher telecom spending (for long haul, metro or edge applications; 5G should be a driver down the road) and a big upgrade cycle within data centers (especially from some big players like Google and Amazon) should drive rapid growth for the foreseeable future. The trick is that earnings are due out tonight; we’ll be looking for a halfway decent entry point assuming shares don’t blow up on the report.

Don’t get us wrong—Inphi isn’t completely insulated from the boom/bust characteristics of the group, as we saw when the Huawei ban took effect (the stock fell sharply in May on that news). But we like its fundamental prospects, love the longer-term chart and are encouraged by the sector’s action. WATCH.
Rule #1: Lose Small

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At the end of the day, our methodology revolves around losing small and winning big. The second piece of that equation is the fun part; hunting for the next big-winning growth stock that can give our portfolio a step-function increase in value.

But losing small is just as important. The fact is, over time, many of your trades will end up cancelling each other out—small losses, modest gains and some breakeven-ish trades. What counts are the outliers, and your job is to make sure those outliers occur on the upside and rarely (if ever) on the downside.

Case in point—Grubhub (GRUB) and Ligand Pharmaceuticals (LGND). Yes, both got hit with the market late last year with everything else, but look at them now: GRUB is barely above its lows from December and is more than 50% off its peak, while LGND actually dove to new lows this week, down 65% from its high!

If you happen to still own one or the other, we’d at least do some selling to respect the ugly action. More important, even in a bull market, don’t forget to honor your stops and loss limits so that your bigger winners will have that much more of an impact on your results.

Cabot Market Timing Indicators

There’s plenty of under-the-surface shenanigans going on due to news flow (Fed, tariffs) and rotation (out of many growth stocks). Our antennae are up, but until things change, we remain bullish as the majority of the evidence remains positive.

Cabot Trend Lines: Bullish

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The Cabot Trend Lines remain clearly bullish, as both the S&P 500 (by 8.2%) and Nasdaq Composite (by a big 9.9%) closing miles above their respective 35-week moving averages. The fact the indexes are stretched so far above their trend lines increases the odds of a shorter-term pullback or pothole, but the overall bull market remains healthy.


Cabot Tides: Bullish

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Our Cabot Tides are still bullish, with all five indexes we track (including the S&P 500, daily chart shown here) above their lower (50-day) moving averages. That said, the market’s lost some steam over the past three weeks, and much more weakness could crack the uptrend. But we always go with what’s in front of us, and today both the intermediate- and longer-term trends are pointed up.

Cabot Real Money Index: Positive

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Some surveys and options activity show complacency, but our favorite sentiment category—money flows—shows no sign of enthusiasm. Our Real Money Index is still in positive territory, with nearly $28 billion yanked out of equity funds and ETFs over the past five weeks. That doesn’t preclude some selling, of course, but historically such caution has led to solid returns during the following month or two.

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Send questions or comments to mike@cabotwealth.com.
Cabot Growth Investor • 176 North Street, Post Office Box 2049, Salem, MA 01970 • www.cabotwealth.com

All Cabot Growth Investor’s buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special bulletins via email and the recorded telephone hotline. To calculate the performance of the portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
Charts show both the stock’s recent trading history and its relative performance (RP) line, which shows you how the stock is performing relative to the S&P 500, a broad-based index. In the ideal case, the stock and its RP line advance in unison. Both tools are key in determining whether to hold or sell.

THE NEXT CABOT GROWTH INVESTOR WILL BE PUBLISHED August 13, 2019

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